Performance is back in vogue for mutual fund advertisements, and that is bad news for investors.
The problem with relying on good numbers is that, "when a fund promotes past performance, there is an implicit suggestion that the results can be sustained," according to a report from The Wall Street Journal by Jonathan Clements.
The language of contemporary fund advertisements is not as rapturous as it had been in 2000, nor as staid as it was during the nadir of the market. This is no reason, however, for investors to trust the advertisements, the report warns.
"Fund companies know that past performance is no guarantee of future results. In fact, if you read the small print in these ads, you usually find words to that effect," Clements wrote. "This is more than just legal boilerplate. It is a story told over and over again."
Historically, past performance is not the mark of a good fund, so investors should rely on other factors in their decision-making. Low-cost index funds and diversification are surer way to financial success.
Clements questions the industry's intentions by attempting to lure investors to their wares for the wrong reasons.
"But fund companies also know that promoting past performance is a great way to attract assets and thereby fatten their own management fees," Clements wrote. "And in the battle between profits for fund shareholders and profits for fund companies, it's no contest. You got it? You flaunt it."
